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How COVID-19 reshapes the EU budget battleground

As Chancellor Merkel and others put it, this is the most challenging moment for Europe (and probably the rest of the world) since WWII. As during WWII and its aftermath, this will also be a time when the patterns of international influence will be redefined by those that will cope the best with the challenges ahead of us, ie. the health crisis and its economic consequences.

Severe disruptions in the commercial routes in general and those of medical equipment and agri-food in particular, combined with the repatriation of expat workers already reveal both the strengths and the vulnerabilities of the social and economic basis of each of the Member States (as well as any country worldwide). These phenomena also reveal why the EU countries need each other and why a Union of culturally similar and economically complementary countries has been created in the first place. But will this complementary relationship be recognised by their leaders to keep pursuing it at the current speed of integration? One thing is certain: the negotiations have become tougher than ever before and the margin for negotiations of each country will also depend on how hard they will be hit by the crisis and how they can manage it.

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As the Council struggles to deliver, Commission President von der Leyen recently raised the stakes by claiming that the next EU Multiannual Financial Framework will serve as the EU ‘Marshall Plan’ for the economic recovery of the continent. This is a rather bold claim, not only because of the relatively small size of the EU budget, but also due to the fact that an agreement is unlikely to be found any time soon due to the deepening conflicts among different national groups (unanimity is required in order to reach an agreement).

This report looks at the impact of the ongoing crisis on the upcoming budgetary negotiations. We found that, far from helping bridge the gaps, the current malaise is likely to harden the positions of the players involved. This includes the opposition of the ‘frugal’ countries to increase the size of the budget, the debate on the rule of law and green conditionality and the backlash against the proposed cuts to agriculture and cohesion funding. While the previous state of play featured an East-West divide on the main budgetary priorities, the increasing rift between North and South adds further complexity to the negotiations. In the sections below, you will find precise mappings of the positions of the different national groups on the most disputed topics of the EU budgetary agenda. This assessment is based on the analysis of the actual positions of the parties coming from across the continent when voting on these subjects in Brussels and Strasbourg.

*VoteWatch Europe is a leading intelligence source on EU policy-making. Our premium subscribers (such as EU public and private influencers, top universities, etc.), benefit from the most advanced analytical tools in EU politics. We also deliver tailored research, presentations or training on MEPs’ and governments’ likely positions and majority building in specific areas. If you are interested in a private service, send us an email ([email protected]) or give us a call (+32 2 318 11 88).

Von der Leyen’s ambition to re-brand the MFF as a ‘Marshall Plan’ for economic recovery warrants a bigger EU budget than the one previously negotiated, possibly passing the threshold of 1.1% of EU GNI (even before the crisis, most members of the European Parliament called for even more ambition, as they supported an increase to 1.3% of EU GNI). These developments indicate that net contributor countries will be under strong pressure to cave in on their opposition to increase the EU budget post-Brexit. However, the governments of these ‘frugal’ countries will also be under strong pressure domestically not to be accused of using taxpayer money to ‘subsidise’ other countries in such a delicate moment for their economies.

One of the big problems of the EU has so far been the fact that the complementary of resources (human, financial, access to markets, etc) between North-South and between West-East has not been properly communicated to the electorates, especially in these ‘frugal’ countries. This has left room for maneuver for nationalist discourse that presents their contributions to the EU budget as “subsidies”, instead of an “exchange of resources”. For instance, the key role of workers from CEE in the economies of the richest countries is now being highlighted by the ongoing shortage of seasonal workers, in particular in the vital agricultural sector, but also in the services.

This will be further complicated by the fact that a prolonged shutdown is likely to severely affect their export-oriented economies (Netherlands, Denmark, Sweden, and Germany have among the biggest trade surpluses in the world), which might play in the hands of the most nationalist factions, at least in the medium term (as previously reported, governing parties are benefiting from a temporary boost due to the emergency).

Note: for the time being we keep the UK in our mapping to highlight who is losing allies after the departure of the British.

As it was the case beforehand, Germany is likely to play a more conciliatory role with regards to the size of the EU budget, also considering that Berlin is going to take over the Presidency of the EU Council in July. However, the recent boost in the level of support for the governing party will provide Merkel’s government with additional political capital during the negotiations. Still, conservative politicians from CDU and CSU will be wary of giving too much away, as this might benefit the nationalist right from Alternative for Germany (as it was the case when Germany agreed to provide the Southern Member States with bailouts during the Eurozone crisis).

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Proposals on rule of law, green conditionality to fuel East-West divide at a critical time

In order to be able to sell a proposal for a bigger budget to their electorates, the net contributors might push more strongly for the revision of the budgetary priorities (e.g. containing spending on agriculture and cohesion) and stronger conditionality. This latter issue puts them at odds with CEE: while currently overshadowed by the North-South Eurozone conflict, the West-East conflict is likely to re-emerge during the discussions on the overall EU budget.

A particular case in point is related to the latest developments in Hungary, as the decision by the Hungarian Parliament to provide Orban’s government with nearly absolute powers (without any precise end-date) led to a strong backlash in the west. Notably, among the parties from the EPP that recently called for the expulsion of Fidesz from the party, there are quite a few coming from net contributor countries, such as the Netherlands, Sweden, Finland, and Denmark. Such developments are also linked to the increasing fears, among the most liberal countries, that the current crisis will boost favourable sentiments towards authoritarianism, as heavy-handed approaches seem to be paying off in containing the emergency (at least in the eyes of the public opinion). We should expect North-Western countries to become more vocal on stronger EU supervision of the rule of law during the upcoming discussions (more specifically, the link between rule of law and EU funding).

While the calls for a rule of law conditionality attached to EU funding are likely to get louder, governing parties from CEE were prompt in calling for a reduced ambition of the European Green Deal. Even though individual climate proposals are likely to go ahead as planned (after being watered down), the debate is set to turn sour with regards to the planned ‘greening’ of the EU budget, in particular as the poorest EU countries fear that strengthened green conditionality will deprive them of essential sources of EU funding at a time when their economies are suffering. The Just Transition Fund seemed to be effective to assuage the concerns of those who will suffer economic losses due to the climate transition. However, this fund will probably need to become much bigger (or to be coupled with other instruments serving a similar purpose) due to the changing circumstances (and increasing economic concerns).

In addition to rejecting conditionality, expect CEE countries to become more vocal in opposing the proposed cuts to cohesion and agricultural policy, in particular as they struggle to cope with the decreasing remittances from their workers abroad, lower demand for their industrial products and more difficult access to the capital markets. As the current crisis sheds light on the importance of food security at a time when international trade faces increasing bottlenecks, expect the biggest food producers to use this as an argument to highlight the importance of supporting agricultural production, as a way to reduce the reliance on agricultural trade to feed the population. While some EU countries such as Belgium and the Netherlands have among the lowest rate of food self-sufficiency, this is the other way around when it comes to the most CAP-friendly countries (such as France and Hungary).

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Southern countries need cash to cope with social ‘emergency’

In this conundrum, Southern countries will play their own game. With regards to the two most affected EU countries so far, Italy and Spain, the size of the budget is likely to matter less compared to how this is allocated and the conditionality. The case of Italy is quite delicate, since the country is a net contributor to the EU budget, while having had the worst economic performance over the past few decades and the second-highest public debt in the EU (a situation that can only be exacerbated by Italy’s initial position as the European epicenter of the pandemic) The German head of the European Stability Mechanism, Klaus Regling, recognized how toxic the issue of Italian budgetary contributions could become during the negotiations, and pointed out that Italy should not be made a net contributor in the next round. Easier said than done, considering that the EU recently lost another net contributor and the remaining ones are far from keen on footing the bill.

What are Southern countries going to prioritise? In addition to preserving cohesion funding for the poorest regions, Southern countries are likely to push for bigger funding of social policy initiatives (as shown by our previous analysis on the matter). These calls will grow even louder, as Mediterranean countries will find it increasingly difficult to cope with the uptick in unemployment levels (it was already above 10% in Spain and Greece before COVID-19 happened). To add salt to the wound, if the current disruption were to extend into the summer, the tourism sector will be disastrously affected (this is one of the major sources of employment in the poorest Southern regions).

For such reasons, demands from the Hague, Vienna and other ‘frugal’ capitals to maintain or even strengthen macroeconomic conditionality will be more toxic as ever as governmental debts skyrocket and the social texture is under pressure. In this regard, it’s important to keep an eye on France, which is generally aligned with its southern neighbours, although it often adopts a more moderate position. This is because the issues of Southern countries are being perceived as less present in the case of France (unemployment, high debt), but also because France has priorities on its own to push forward (with a particular focus on defence, agriculture, etc.).

*VoteWatch Europe is a leading intelligence source on EU policy-making. Our premium subscribers (such as EU public and private influencers, top universities, etc.), benefit from the most advanced analytical tools in EU politics. We also deliver tailored research, presentations or training on MEPs’ and governments’ likely positions and majority building in specific areas. If you are interested in a private service, send us an email ([email protected]) or give us a call (+32 2 318 11 88).